Mullet Technologies is considering whether or not to refund a $75 million, 12% cou- pon, 30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12% bonds over the issue?s 30-year life. Mullet?s investment banks have in- dicated that the company could sell a new 25-year issue at an interest rate of 10% in to- day?s market. Neither they nor Mullet?s management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase. A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Mullet?s marginal federal- plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securi- ties returning 6% annually during the interim period. a. Perform a complete bond refunding analysis. What is the bond refunding?s NPV? b. What factors would influence Mullet?s decision to refund now rather than later? Provide excel file to match this.

Problem 20-5 Input Data ( in thousands of dollars) Existing bond issue= Original floation cost= Maturity of original debt= Years since old debt issue= Call premium (%)= Original coupon rate= After-tax cost of new debt= New bond issue= New floatation cost= New bond maturity= New cost of debt= Tax rate= Short-term interest rate= SCHEDULE OF CASH FLOW Before -tax After -tax Investment Outlay Call premium on the old bond Floatation cost on new issue Immediate tax savings on old floation cost expanse Extra interest paid on old issue Interest earned on short-term investment Total after-tax investment Annual Flotation Cost Tax Effects: T=1 to 20 Annual tax savings from new issue floatation costs Annual lost tax savings from old-issue flotation costs Net flotation cost tax savings CALCULATING THE ANNUAL FLOTATION COST TAX EFFECT AND THE ANNUAL INTEREST SAVINGS Annual Flotation Cost Tax Effects Maturity of the new bod(Nper) After-tax cost of new debt (Rate) Annual flotation cost tax savings (Pmt) Annual Interest Savings Maturity of the new bond (Nper) After-tax cost of new debt (Rate) Annual Interest savings (Pmt) Since the annual flotation cost tax effect and interest savings occur for the next 20 years, they represent annuities. To evaluate this project, we must find the present values of these savings. Using the function wizard and solving for present value, we find that the present values of these annuities are: NPV of annual flotation cost savings NPV of annual interest savings: Hence, the net present value of this bond refunding project will be the sum of the initial outlay and the present valus of the annual flotation cost tax effects and interest savings. Bond Refunding NVP Bond Returning NVP Bond Refund NPV = = = Initial Outlay + + PV of flotation costs + + PV of interst savings